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Labor Management and Control

Labor Management and Control. chapter 11. Opening Questions. For current workers, how do you know how much gross (pre-tax) income you should earn each week? How much money would you earn if you worked 40 hours this week? 45 hours?

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Labor Management and Control

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  1. Labor Management and Control • chapter 11

  2. Opening Questions • For current workers, how do you know how much gross (pre-tax) income you should earn each week? • How much money would you earn if you worked 40 hours this week? 45 hours? • Are you ever scheduled for a certain number of hours only to find that by week’s end you’ve worked more or fewer hours?

  3. Calculating Labor Costs • Standard = budgeted • Actual = the cost based on the real hours actually worked Using a work schedule and a list of each employee’s hourly wages or annual salary, a manager can calculate a department’s weekly standard labor cost.

  4. Labor Cost for Hourly Workers Preliminary Labor Cost = Hours Scheduled (or worked) X Hourly Rate • Preliminary means before benefits • Using scheduled hours yields standard cost • Using worked hours yields actual cost

  5. Example 11a Employee earns $11.75/hour and is scheduled for 45 hours this week. What is preliminary standard labor cost? • Note: Overtime earns 1.5 times the regular rate • Preliminary Labor Cost • =(40 hours X $11.75) + (5 hours X $11.75 X 1.5) • = $470 + $88.13 • = $558.13

  6. Salaried Workers • Get the same size paycheck each week no matter how many hours or days they work • Annual salaries can be divided into daily salaries by dividing by 365 days per year.

  7. Labor Cost for Salaried Workers Preliminary Daily Labor Cost = Annual Salary ÷ 365 days • Preliminary Labor Cost for any period of time is the daily cost X the number of days in the period EXAMPLE: Preliminary Weekly Labor Cost = Preliminary Daily Labor Cost X 7

  8. Example 11b Salaried worker earns $40,000 per year. What is the weekly labor cost before benefits? • Pre. Daily Labor Cost = • $40,000 ÷ 365 • = $109.59 • Pre. Weekly Labor Cost = • $109.59 X 7 • = $767.12

  9. Accounting for Benefits Standard (or Actual) Labor Cost = Preliminary Labor Cost X (1 + benefits percent) All workers have some benefits cost, even if just for social security and workers’ comp. Benefits and costs may differ between employees. Benefits cost typically calculated as a percent of wages or salary

  10. Example 11c Employee is scheduled for 39.5 hours at $9.50/hour. Benefits cost is 13.8%. What is the employee’s standard labor cost? Pre. Labor Cost = 39.5 h X $9.50/h = $375.25 Standard Labor Cost = $375.25 X (1 + 0.138) = $427.03

  11. Example 11d Manager earns $45,000 annually with benefits package worth 28.3% of salary. What is the manager’s weekly labor cost? • Pre. Daily Labor Cost = $45,000 ÷ 365 = $123.29 • Pre. Weekly Labor Cost = $123.29 X 7 = $863.03 • Weekly Labor Cost = $863.03 X (1 + 0.283) = $1,107.27

  12. Department Labor Cost • Computerized labor cost spreadsheet includes (for each employee): • name • title • hourly or daily pay rate • benefits percent • hours (either scheduled or worked) • Enter formulas in advance and the manager only needs to enter each employee’s hours each week. • For department or company labor cost, add the labor costs for all of the employees

  13. Department Labor Cost (cont.)

  14. Standard vs. Actual Labor Costs • Actual and Standard are rarely identical • Salaried workers earn the same amount, but hourly workers may have schedules adjusted • Big variances between standard and actual labor costs may be sign of poor management

  15. Labor Cost Percent • Actual and standard costs in dollars may vary greatly as business volume changes, but labor cost percents should be close • Labor cost percents compare labor cost to total sales

  16. Labor Cost Percent Formula Labor Cost ($) • Labor Cost and Sales must cover same time period • Standard labor cost % uses standard labor cost and sales dollars • Actual labor cost % uses actual labor cost and sales dollars Labor Cost % = Sales ($)

  17. Example 11e Calculate weekly standard labor cost percent if standard weekly labor cost is $14,200 and forecast sales for that week are $48,500. • Labor Cost % • = $14,200 ÷ $48,500 • = 0.293 or 29.3%

  18. Example 11f • Standard = $12,100 ÷ $38,000 = 31.8% • Actual = $12,850 ÷ $39,400 = 32.6% • Labor cost went up despite stronger sales • Poor performance by management Restaurant budgets $12,100 in weekly labor cost and $38,000 in weekly sales. Actual figures for that week are $12,850 in labor and $39,400 in sales. Compare standard and actual weekly labor costs for the restaurant.

  19. How Labor Cost relates to Profit Fixed costs do not change with business volume, so higher sales beyond budget should generate greater profits if management controls variable costs. Profit (not labor cost) is the ultimate measure of management performance, so reduced labor cost only helps profit if other costs are not equally increased

  20. Measuring and Improving Performance • Some measures evaluate each employee’s performance • Other measures evaluate a team of workers when a productivity value cannot be assigned to each worker separately Person-Hours are the sum of work hours completed by all the people in a group or team for a given period of time

  21. Sales per Person or Person-Hour Sales per person compares dollars in sales generated by each server and comes from POS. Total Sales for a Period Sale per Person-Hour = Person-Hours for a Period

  22. Example 11g • Person-hours = 5 workers X 4 hours = 20 • Sales per person-hour = $8,425 ÷ 20 person-hours • = $421.25/person-hour During 4-hour dinner service, restaurant earns $8,425 in sales. 3 cooks and 2 dishwashers all work the full 4-hour shift. Calculate sales per person-hour for this team.

  23. Covers per Person Covers per person measures the number of customers served by each server; comes from POS. Servers who handle more customers are more valuable Covers for a Period Covers per Person-Hour = Person-Hours in a Period

  24. Example 11h Team of 3 cooks and 1 dishwasher work from 11:00 – 2:00 for lunch service and serve 295 covers. What is this team’s covers per person-hour? • Person-hours • = 4 workers X 3 hours • = 12 • Covers per person-hour • = 295 covers ÷ 12 person-hours • = 24.6 covers/person-hour

  25. Sales and Covers per Person-Hour • Sales per person-hour and covers per person-hour are meaningless in an absolute sense. Measure to set a baseline and then improve efficiency from there. • They help interpret labor cost numbers, which are impacted somewhat by varying wage rates of the employees scheduled

  26. Errors per Cover Errors per cover measure quality of worker performance. • Error or Void is • a mistake that results in an unsellable dish (dropped, burned, customer-rejected, etc.)

  27. Errors per Cover (cont.) Errors in a Period • Errors per cover should always be a decimal well below 1. • Errors per cover should not change with business volume, or management must act to improve employee work quality Errors per Cover = Covers in Same Period

  28. Example 11i Restaurant served 417 guests during dinner but had 13 food “errors.” What is this restaurant’s errors per cover rate? • Errors per cover • = 13 errors ÷ 417 covers • = 0.031 errors/cover

  29. Factors that Impact Performance and Labor Cost • Turnover • Scheduling • Facility Layout • Equipment • Menu • Outsourcing • Training • Motivating and Managing Employees Effectively • Forecasting Accurately • Reducing Injuries and Illness

  30. Prime Cost Labor Cost and Food Cost sometimes work together. Cutting labor by buying pre-fab ingredients can increase food cost and leave profit stagnant.

  31. Example 11j Weekly cost of goods sold is $1,730; labor cost for same week is $1,589. What is prime cost for that week? • Prime Cost = cost of goods sold + labor • = $1,730 + $1,589 • = $3,319

  32. Prime Cost Percent Prime Cost Prime Cost % = Sales

  33. Example 11k Café has prime cost of $3,319 during same week it has sales of $5,720. What is café’s prime cost percent? • Prime Cost % = prime cost÷ sales • = $3,319 ÷ $5,720 • = 58.0%

  34. Prime Cost (cont.) • Reducing prime cost % (by reducing food, beverage, or labor cost without increasing the others) usually leads to higher profits • Prime cost % must not be cut at the expense of the business’s quality standards or long-term revenue and profit may suffer.

  35. Example 11l • Restaurant budgets $18,430 for cost of goods sold and $21,070 in labor cost for January. • Sales are forecast to be $70,000. • At month’s end, actual figures are • $16,590 for cost of goods sold • $19,962 for labor cost • $64,800 in sales. Compare restaurant’s standard and actual prime costs and prime cost percents.

  36. Example 11l (cont.) • Standard prime cost = $18,430 + $21,070 = $39,500 • Actual prime cost = $16,590 + $19,962 = $36,552 • Standard PC% = $39,500 ÷ $70,000 = 56.4% • Actual PC% = $36,552 ÷ $64,800 = 56.4% • Costs were controlled very well in a month that fell below sales targets

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